Unit 7 missed questions

A customer of an investment adviser inadvertently mails some stock certificates to the IA. The IA does not maintain custody of customer assets. If the certificates were received on a Monday, NASAA rules would requires that the certificates be A) returned no later than Thursday B) forwarded to the broker-dealer promptly C) returned the same day D) returned no later than Tuesday

A) returned no later than Thursday NASAA's custody rules require that an investment adviser who does NOT maintain custody must return certificates that are mistakenly sent within 3 business days.

Which of the following is responsible for administration of the Bank Secrecy Act? A) Securities and Exchange Commission B) Department of Health and Human Services C) Security Services D) The Financial Crimes Enforcement Network

D) The Financial Crimes Enforcement Network Or FinCEN as it is more commonly printed.

One of the prohibited practices under the Uniform Securities Act is market manipulation. Which of the following are examples of a broker-dealer engaging in that practice? Arbitrage Churning Matched orders Wash trades

Matched orders and wash trades

When an investment adviser chooses to use a solicitor, the Investment Advisers Act of 1940 requires all of the following conditions EXCEPT A) either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement B) the solicitor must register with the SEC as an investment adviser C) the solicitor must not be subject to disciplinary actions involving finance or dishonesty D) the solicitor must provide the customer with a copy of the investment adviser's brochure

B) the solicitor must register with the SEC as an investment adviser

An agent wants to sell a highly valuable unregistered, nonexempt security to a customer. The agent has the client sign a waiver indicating that the security is not registered, so the security may be sold legally per the Uniform Securities Act. This sale of the security is A) perfectly legal because unregistered nonexempt securities need not be registered B) appropriate providing the client does not request a rescission of the sale C) perfectly legal with disclosure and waiver on registration D) illegal because provisions of the Uniform Securities Act cannot be waived

D) illegal because provisions of the Uniform Securities Act cannot be waived

A federal covered investment adviser would like to charge a client a performance fee based on a selected benchmark. The client has $400,000 invested with the adviser but has a net worth of $2,150,000, of which $350,000 represents an investment account, 50% of which is shared with his cousin. A) Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. B) Because the total of the amount invested with the adviser ($400,000) plus the individual's personal net worth ($1,800,000 without counting the joint property) exceeds $2 million, this client has the necessary net worth to qualify for a performance-based compensation program. C) Because we can allow all of the jointly held property, this client has the necessary net worth to qualify for a performance-based compensation program. D) Because the client's 50% share of the investment account is only $175,000, this client does not qualify for a performance-based compensation program.

A) Because we can allow none of the jointly held property, this client does not have the necessary net worth to qualify for a performance-based compensation program. Under federal (and state) law, in order to qualify for a performance-based compensation program, the client must have either $1 million in assets managed by the adviser or a net worth in excess of $2.1 million. This requirement is described in Rule 205-3 of the Investment Advisers Act of 1940 and the NASAA Model Rule makes reference to the federal rule. If using joint assets, only those with a spouse are allowed.

An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A) must share the commission with the broker-dealer that prepared the research document B) need not disclose the source of the information C) must notify the client that the recommendation was based on the broker-dealer's research document D) must provide the client with a copy of the research document

B) need not disclose the source of the information If the adviser uses third-party reports as a basis for its own recommendation or as a support to its own recommendation to its client, it does not have to disclose this information.

James Jones, quarterback for a National Football League franchise team, deliberately misstated material information in the private sale of securities he owned. Jones claims he is not subject to the antifraud provisions of the Uniform Securities Act because he is not a registered agent and, secondly, the securities involved are exempt from registration requirements of the act. Which of the following statements is TRUE? A) As a professional athlete, Jones is not in the securities business and is therefore not subject to the antifraud provisions of the act. B) Jones's failure to accurately state material facts does not constitute fraud because the securities he sold were exempt from registration. C) The antifraud provisions of the USA do not apply to Jones because he is not suitably trained nor does he have a securities license. D) The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security.

D) The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security. The antifraud provisions of the USA apply to any person who acts fraudulently in connection with the offer, sale, or purchase of a security, even in the case of an isolated nonissuer transaction like this. While Jones, as a private individual, is not subject to the registration provisions of the act, he is liable for fraud when selling securities, whether registered or not. The fact that Jones is not trained in the securities business does not exempt him from the prohibition against fraud when engaged in the sale of securities.

NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? I. Transaction-based compensation, such as commissions on recommended securities II. 12b-1 trails on no-load mutual funds in the client's portfolio III. Expenses reimbursed by third-party sources IV. Compensation-sharing arrangements between the investment adviser and its representatives

I, II, and III

An adviser's client account indicates daily trading with rapid portfolio turnover. Under NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this would NOT be considered excessive trading activity (churning) if A) the client's investment objective is quick return, the client has the financial resources necessary for such activity, and the agent uses a sophisticated technical program designed to cut losses and take profits quickly B) the client has approved each trade C) the client's account shows a profit D) each security purchased is suitable for the client

A

During your training, you overhear your manager discussing the Chinese wall. This is probably referring to A) internal provisions enacted to prevent material, nonpublic information from leaking from one department of the firm to another B) takeout for lunch C) a leading tourist attraction in China D) the increasingly high percentage of U.S. government bonds held by the Chinese

A

Which of the following statements regarding matched orders is TRUE? A) Matched orders reflect the timing of capital gains to be offset by capital losses and are considered an effective and permissible tax minimization strategy. B) Matched orders violate trading rules because they create the illusion of trading volume where such volume would not otherwise occur. C) Matched orders are a prohibited practice because they entail allocation of IPO stock in proportion to the level of customer trading activity. D) Advisers should pursue matched orders because they mirror an investor's trading objectives and time horizon.

B

Currency Transaction Reports must be filed for cash transactions that exceed A) $50,000.00 B) $10,000.00 C) $100,000.00 D) $25,000.00

B) 10,000 This report would include cash transactions used to pay off loans, electronic transfer of funds, and purchases of certificates of deposit, stocks, bonds, mutual funds, or other investments with cash.

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) An account in the name of the State of X employee pension fund B) A margin account in the name of Mary Beth Simmons C) An account in the name of the Wells Morgan Bank D) A margin account in the name of the Interglobal Hedge Fund

B) a margin account in the name of mary beth simmons The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies.

An agent may determine which securities to purchase or sell for a client when A) written or oral discretion authority has been received by the broker-dealer before executing the first discretionary transaction B) written discretion authority has been received by the broker-dealer before executing the first discretionary transaction C) written discretion authority has been received by the broker-dealer within 10 days of the initial discretionary transaction D) written or oral discretion authority has been received by the broker-dealer within 10 days of the initial discretionary transaction

B) written discretion authority has been received by the BD before executing the first discretionary transaction No broker-dealer or any of its employees shall exercise any discretionary power in any customer's account or accept orders for an account from a person other than the customer without first obtaining written authorization from the customer. It is an investment adviser who may act with oral consent for a period of 10 days from the initial discretionary trade.

A federal covered investment adviser may enter into a contract with a client that provides for performance-based compensation under all of the following conditions EXCEPT A) the formula used to calculate compensation includes realized capital losses and unrealized depreciation B) compensation is based on gains, less losses, for a period of no less than 1 year C) disclosure that the performance compensation may create an incentive for the adviser to take greater risks D) the client must meet certain minimum financial standards

C

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an aggressive entrepreneur whose net worth is $1.8 million who has $500,000 under the adviser's management B) Charging a performance-based fee to an individual who meets the definition of an accredited investor C) Charging a performance-based fee to an elderly client whose net worth is $2.2 million, with only $150,000 under the adviser's management D) Charging a performance-based fee to an individual with a net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks

C Performance fees may be charged, regardless of the client's age, to anyone with a net worth in excess of $2.1 million or with at least $1 million under management with the firm.

Which of the following would most likely be considered a prohibited practice under the Uniform Securities Act? I. Recommending tax shelters to low-income retirees II. Stating that a state Administrator has approved an offering based on the quality of information found in the prospectus III. Soliciting orders for unregistered, nonexempt securities IV. Employing any device to defraud A) I only B) I and II C) I, II, and III D) I, II, III, and IV

D) I, II, III, and IV

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an investment adviser who has custody of client securities or funds must do all of the following EXCEPT A) if not held by a qualified custodian, deposit client funds into one or more bank accounts, not commingled with adviser funds, and notify the clients in writing of where and in what manner the funds are held B) have client funds and securities examined at least once a year by an independent public accountant on a surprise basis C) notify the Administrator in writing D) send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period

D) send clients semiannual, itemized statements detailing the funds and securities in the adviser's custody at the end of the period and all transactions during the period The adviser must send clients quarterly, itemized statements listing the funds and securities in the adviser's custody at the end of the period and all transactions during the period. The adviser must also arrange for an annual, surprise audit by an independent public accountant of client funds and securities.

A unique requirement for those investment advisers who maintain custody of customer assets is the filing of A) the Form ADV Part 1 B) the Form ADV Appendix 1 C) the Form ADV-H D) the Form ADV-E

D) the form ADV-E

Under the Investment Advisers Act of 1940, an adviser who has custody of a client's funds must I. notify a client when the client's funds are moved to another location II. segregate client's funds and keep them identified by client III. not move the client's funds without prior notification and specific written authority from the client

I and II It is not necessary to notify the client before the move to obtain the client's specific written authority to move the fund. The original custodial agreement includes that authority at the discretion of the adviser.

Which of the following are discretionary orders? I. A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. II. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. III. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. IV. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate.

I and III Discretion authorizes a representative to choose the security, the amount of shares, or whether to buy or sell. Time and price alone are not discretionary decisions.

Written discretionary authorization is not required for an agent to choose which of the following order instructions? Security to be bought or sold Number of shares to be bought or sold Time of execution Price of execution

Time of execution and price of execution